A roadmap to wealth
Buy a good asset.
Pay a sensible price.
Survive the ups and downs.
Repeat.
Showing posts with label Investing. Show all posts
Showing posts with label Investing. Show all posts
Warren Buffett has said "Be greedy when others are fearful and fearful when others are greedy" . Is there all there is to it?
Sometimes you should be greedy when others are fearful and fearful when others are greedy.
There are also times when you should be greedy when others are greedy and fearful when others are fearful.
These two conditions occur rarely. Most of the time what other's think is not relevant. They should be shut out and you must think for yourself.
Sometimes you should be greedy when others are fearful and fearful when others are greedy.
There are also times when you should be greedy when others are greedy and fearful when others are fearful.
These two conditions occur rarely. Most of the time what other's think is not relevant. They should be shut out and you must think for yourself.
Is there a place for active management?
There is a place for active fund management but it's not what you think it is and it is not the way you think it works:
A passive investor does only certain things. Straying from it invites considerable risk.
An active investor must do everything a passive investor does and when he does something different it is only after bringing a great deal of intelligent effort.
Intelligent effort is characterised by having the right mental framework for decision making, skill, considerable experience, tested judgement and more then a trace of wisdom.
In most years he will do no better then the passive investor but every now an again the active effort will pay off. Over large amounts of time the additional gains add up.
"The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor." Ben Graham in "
The Intelligent Investor", 1949.
Background:
The failure of mutual funds to beat the Indexes. Ponzy schemes that emerged during the credit crisis. The outlandish fees that were charged by Hedge funds while producing little benefit over index returns. All these issues have sewn the thread of doubt in active investment management.
There is a place for active fund management but it's not what you think it is and it is not the way you think it works:
A passive investor does only certain things. Straying from it invites considerable risk.
An active investor must do everything a passive investor does and when he does something different it is only after bringing a great deal of intelligent effort.
Intelligent effort is characterised by having the right mental framework for decision making, skill, considerable experience, tested judgement and more then a trace of wisdom.
In most years he will do no better then the passive investor but every now an again the active effort will pay off. Over large amounts of time the additional gains add up.
"The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor." Ben Graham in "
The Intelligent Investor", 1949.
Background:
The failure of mutual funds to beat the Indexes. Ponzy schemes that emerged during the credit crisis. The outlandish fees that were charged by Hedge funds while producing little benefit over index returns. All these issues have sewn the thread of doubt in active investment management.
Belief, Understanding and Courage
In most things but particularly Investing, understanding is not enough. To be successful the leap must be made from understanding to belief. That leap is anything but easy.
But without it the vital ingredient of courage will not follow.
In most things but particularly Investing, understanding is not enough. To be successful the leap must be made from understanding to belief. That leap is anything but easy.
But without it the vital ingredient of courage will not follow.
Courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand
Benjamin Graham from the Intelligent Investor
Value and Growth are connected at the hip.
The job of the investor, unfortunately, is much harder, he or she has to find a stock that has it's economics and growth intact at a price that is reasonable.
Background:
There is an ongoing discussion about those who look for stocks with high growth and those who look for stocks that are deeply discounted. A growth stock without sound economics will eventually burn out and as luck would have it just after you buy it. Similarly, a deeply discounted stock is usually discounted for a reason.
There is no value without growth and no growth without value.Warren Buffett
The job of the investor, unfortunately, is much harder, he or she has to find a stock that has it's economics and growth intact at a price that is reasonable.
Background:
There is an ongoing discussion about those who look for stocks with high growth and those who look for stocks that are deeply discounted. A growth stock without sound economics will eventually burn out and as luck would have it just after you buy it. Similarly, a deeply discounted stock is usually discounted for a reason.
The Casino
For every game there are two sides: the player and the owner. Both sides are attempting to make money from the same game. For the player, it is entertainment but for the owner it is a business. What separates the two are the odds or the margin of safety. For the player it is against him. For the owner it is with him. If the player forgets this fact, he courts disaster. If the owner forgets this fact he may behave foolishly and, therefore, not do as well as he could.
The analogy describes the difference between the speculator(player) and the investor(owner).
For every game there are two sides: the player and the owner. Both sides are attempting to make money from the same game. For the player, it is entertainment but for the owner it is a business. What separates the two are the odds or the margin of safety. For the player it is against him. For the owner it is with him. If the player forgets this fact, he courts disaster. If the owner forgets this fact he may behave foolishly and, therefore, not do as well as he could.
The analogy describes the difference between the speculator(player) and the investor(owner).
If you do all the right things, will you get outstanding results?
Not necessarily.
Warren Buffet, preface to the fourth edition of the Intelligent Investor
I might add to Buffet's quote the fact that you have to be able to take advantage of a market folly.
Not necessarily.
You will probably, however, not get a bad result.Although competence and hard work are necessary, luck is essential
Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock market folly that prevail during your investing career
Warren Buffet, preface to the fourth edition of the Intelligent Investor
I might add to Buffet's quote the fact that you have to be able to take advantage of a market folly.
If you develop all the right attributes, will decision making become easy?
Not necessarily. There is one other ingredient, Courage.
Not necessarily. There is one other ingredient, Courage.
Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right, Similarly, in the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.Benjamin Graham from the Intelligent Investor
Focus on Net Worth
In my investment fund I tell my shareholders what they should be focusing on:
Our focus is on Net Worth not Profit or Loss. If we sell a share that has capital gain, the gain will show up as profit. We may have given up, however, the future potential of the company. There are times we must sell the share and perhaps precipitate a loss. The future potential of the company has changed and it can go to zero or a mistake was made. There are times when selling one share and buying another is a sensible thing to do. The shareholder should look pass the noise and focus on the long term Net Worth of the company.
This is also true of the individual investor.
In my investment fund I tell my shareholders what they should be focusing on:
Our focus is on Net Worth not Profit or Loss. If we sell a share that has capital gain, the gain will show up as profit. We may have given up, however, the future potential of the company. There are times we must sell the share and perhaps precipitate a loss. The future potential of the company has changed and it can go to zero or a mistake was made. There are times when selling one share and buying another is a sensible thing to do. The shareholder should look pass the noise and focus on the long term Net Worth of the company.
This is also true of the individual investor.
What to pay attention to?
"What I pay attention to is earning power. Coca-Cola has no tangible common equity. But they've got huge earning power. And Wells ... you can't take away Wells' customer base. It grows quarter by quarter. And what you make money off of is customers. And you make money on customers by having a helluva spread on assets and not doing anything really dumb. And that's what they do"
Warren Buffett - talking about Wells Fargo, CNN Money interview
"What I pay attention to is earning power. Coca-Cola has no tangible common equity. But they've got huge earning power. And Wells ... you can't take away Wells' customer base. It grows quarter by quarter. And what you make money off of is customers. And you make money on customers by having a helluva spread on assets and not doing anything really dumb. And that's what they do"
Warren Buffett - talking about Wells Fargo, CNN Money interview
Price is what you pay, value is what you get.
When you buy a stock there are three things that determine ultimate success:
What you buy?
Buy stocks that you know will be significantly larger over the long run.
How you behave?
Look at the business not the market and make sensible decisions.
What price you pay?
Look for a margin of safety.
When you buy a stock there are three things that determine ultimate success:
What you buy?
Buy stocks that you know will be significantly larger over the long run.
How you behave?
Look at the business not the market and make sensible decisions.
What price you pay?
Look for a margin of safety.
Focus on the emotional cycle
The market goes through four emotional cycles :
Pessimism, Skepticism, Optimism and Euphoria
Market commentators during times of pessimism and skepticism tend to advise their pubic that they should trade the market. Articles appear about how the buy and hold strategy is dead. The rapid swings of the market make their arguments convincing and because the period is characterized by a great deal of fear, the strategy offer's a feeling of safety and for a few profitability. In reality thou executing successfully is almost impossible. The irony about the advise is the fact that stocks offer the greatest margin of safety during these periods. Just about nothing creates the best prices then fear. It is precisely during these times that the buy and hold strategy should be applied.
Optimism and euphoria have the opposite effect. Stocks lose their margin of safety due to inflated prices. It is because foolishness can go on for what feels like eternity, especially if you are out of the market, that the buy and hold strategy takes hold backed by advice from those in the know. In reality the sensible thing to do, during this period, is to sell and trade. By reducing stocks and moving into other assets you then prepare for the eventual decline.
The market goes through four emotional cycles :
Pessimism, Skepticism, Optimism and Euphoria
Market commentators during times of pessimism and skepticism tend to advise their pubic that they should trade the market. Articles appear about how the buy and hold strategy is dead. The rapid swings of the market make their arguments convincing and because the period is characterized by a great deal of fear, the strategy offer's a feeling of safety and for a few profitability. In reality thou executing successfully is almost impossible. The irony about the advise is the fact that stocks offer the greatest margin of safety during these periods. Just about nothing creates the best prices then fear. It is precisely during these times that the buy and hold strategy should be applied.
Optimism and euphoria have the opposite effect. Stocks lose their margin of safety due to inflated prices. It is because foolishness can go on for what feels like eternity, especially if you are out of the market, that the buy and hold strategy takes hold backed by advice from those in the know. In reality the sensible thing to do, during this period, is to sell and trade. By reducing stocks and moving into other assets you then prepare for the eventual decline.
Economic forecast and why they are seldom correct both in predicting a crash or recovery
There is a axiom about stock market crashes:
"The causes are always different but the results are always the same"
In fact if you think about it this makes complete sense. Because the causes are unknown and come out of the blues that they cause so much panic and fear, such as the credit crisis. No one knows what to expect. The mind conjures up dire consequences, some of which do happen. Recovery happens in the stock market when the fear of the unknown abates either because the market becomes numb to the consequences or that they feel the consequences won't be as bad as they think. This would explain why the market almost always recovers before the economy does.
This would also explain Sir John Templeton's observation:
"Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria"
There is a axiom about stock market crashes:
"The causes are always different but the results are always the same"
In fact if you think about it this makes complete sense. Because the causes are unknown and come out of the blues that they cause so much panic and fear, such as the credit crisis. No one knows what to expect. The mind conjures up dire consequences, some of which do happen. Recovery happens in the stock market when the fear of the unknown abates either because the market becomes numb to the consequences or that they feel the consequences won't be as bad as they think. This would explain why the market almost always recovers before the economy does.
This would also explain Sir John Templeton's observation:
"Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria"
Investing Successfully
Success requires the work of generating ideas and capital. It requires the wisdom to differentiate between good and bad ideas. It requires the patience to wait for opportunity, then for results. The courage to act when your data and logic tell you and not what the market says. The temperament to do nothing when there is nothing you should be doing. The competence to manage the business and above all luck.
Success requires the work of generating ideas and capital. It requires the wisdom to differentiate between good and bad ideas. It requires the patience to wait for opportunity, then for results. The courage to act when your data and logic tell you and not what the market says. The temperament to do nothing when there is nothing you should be doing. The competence to manage the business and above all luck.
The difference between an Economist and an Investor
The economist looks at the forest and glances at the trees. The investor looks at the trees and glances at the forest.
Furthermore, the more prevalent practice in economic forecast is to look at the recent past and project forward almost in a straight line.
The practice should be to look at the recent past, temper that within historic and overall trends and provide a weighted judgment of different possibilities.
The lesson here is that if a investor relies on economic forecast to invest, he will likely miss out on opportunity.
The economist looks at the forest and glances at the trees. The investor looks at the trees and glances at the forest.
Furthermore, the more prevalent practice in economic forecast is to look at the recent past and project forward almost in a straight line.
The practice should be to look at the recent past, temper that within historic and overall trends and provide a weighted judgment of different possibilities.
The lesson here is that if a investor relies on economic forecast to invest, he will likely miss out on opportunity.
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